Comparing Revenue Expenditures & Capital Expenditures

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  • 00:00 Types of Expenditures
  • 1:12 Capital Expenditures
  • 2:03 Revenue Expenditures
  • 2:50 Examples of Expenditures
  • 4:08 Comparing Expenditures…
  • 5:17 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Accountants view revenue expenditures and capital expenditures very differently. But how do you tell the difference? This lesson explains how to categorize the two types of expenditures for accounting purposes.

Types of Expenditures

Congratulations on starting your new widget company! Of course, before you will make the first penny off your widgets, you will have to make sure that your accounting practices are up to standards. After all, what's the point of making money if you don't know where it is going?

Getting into the widget business has been an expensive endeavor. As a result, you've already got a stack of receipts for everything that you've had to buy. You did save those receipts, right? Okay, good.

Anyway, you've got a big pile of receipts and are starting to put all of it together in order to make sure that your newly-hired accountant isn't swamped with work. She said that as long as you can sort it between capital expenditures and revenue expenditures that she'd be happy to do the rest.

Luckily for you, that won't take much time at all! That's because you remember the basic difference between the two types of expenditures. Capital expenditures are any expense that comes from gaining the ability to produce a product or service, whereas revenue expenditures are expenses that are involved in the actual manufacture of goods.

Capital Expenditures

Understanding what a capital expenditure is is important because the rules of accounting let you treat capital expenditures differently. This is because the cost of capital expenditures can be spread out across accounting periods.

Most obviously, you don't have to charge them all right away. After all, you'll be using these implements for quite some time, if all goes as planned. Instead, capital expenditures are often filed as property, plant, and equipment. This comes with some significant advantages.

For starters, you can spread out paying for these expenses over time. This is because they are considered to be assets, not inputs. Also, you can take a depreciation expense every year for anything that is a capital expenditure, except land. This is to make up for the fact that these assets are losing value.

Revenue Expenditures

Still, not everything that you have purchased is a capital expenditure. There are many revenue expenditures still to be considered, like wages, supply costs, utilities, and repair costs. These costs are really only useful in that particular moment and have no further effective life.

The wages that you pay your employees only really guarantee that they will come to work on days that you pay them. Sure, many of them may love working for your widget factory, but they aren't going to come in and work on Saturday for free! Likewise, paying your electric and water bills does not guarantee that there will be electricity and water without payment in the future. As such, it's best to clear these items off the ledger and match them with revenues from the same period.

Examples of Expenditures

So back to your widget factory. Chances are that when you built your widget factory, you didn't get it for free. All the construction costs of building the factory are considered capital expenditures. So, too, are all the costs with equipping the factory with what is needed to make widgets. All of that fancy machinery used to produce the best widgets around can be categorized as a capital expenditure. In fact, as long as you weren't having the workers bring their own tools, any tools that you provide can be considered to be capital expenditures.

From earlier, you probably figured out that the electricity and water needed to make your widget factory work are revenue expenditures. So, too, are all the raw materials needed to make widgets. Whether it's just old-fashioned plastic or computer chips for 'smart' widgets, anything that can be directly turned into a widget is a revenue expenditure.

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